2014 (8) TMI 724 - AT - Income Tax

Restriction on expenses Held that - The assessee has debited ₹ 11,39,93,239/- to its profit and loss account - the assessee has Suo Moto made certain disallowance in respect of inadmissible items which include expenses inadmissible ₹ 10,00,000/- commission Rs..98.41 lakhs provision for doubtful debt Rs..43.09 lakhs, Statutory liability ₹ 53.17 lakhs, freight of Rs..6.90 lakhs, Site installation Rs..4.61 lakhs and Prior period expenses of ₹ 2.04 lakhs - The details of expenditure debited to profit & loss account also includes repairs to machineries, site expense, commission, bad debts and miscellaneous expenses and some other expenses - the AO seems unwarranted as the necessary details were much available before the CIT(A) which has not been considered by the CIT(A) and since the assessee itself has disallowed expenses a further disallowance is uncalled for Decided in favour of Assessee. Estimation of interest towards work in progress Held that - Schedule C and schedule D of the balance sheet show the amount of secured loans and unsecured loans, secured loans contain term loan from bank, cash credit/working capital from bank and term loan for machinery - Unsecured loans refers to the optionally convertibility debentures and interest free loan under sales tax deferral scheme - on these borrowings, the assessee has paid interest amounting to ₹ 1.99 crores out of which interest on debentures is ₹ 1.44 cores and other interest is ₹ 54.83 lakhs - So far as, interest on debentures is concerned no attribution is required the matter is remitted back to the AO for examination and fresh adjudication Decided in favour of Assessee. Claim of deferred sales tax Held that - Assessee rightly claimed that a revised computation of income was filed during the course of assessment proceedings in which the deferred sales tax claim which was added back in the original computation of income, has been withdrawn thus, the matter is remitted back to the Ao for fresh adjudication Decided in favour of Assessee. Treatment of interest income - Income from other sources or profit & loss of business Held that - A perusal of schedule G of current assets forming part of the balance sheet show that the fixed deposits are lodged with banks as margin for funding working capital facilities, which shows that the fixed deposits have a direct nexus with the working capital facilities availed from the bank - the interest earned from such deposits of the money kept apart for the purpose of business is to be taxed under the head income from the business and could be not taxed under income from other sources relying upon Commissioner of Income-Tax Versus Indo Swiss Jewels Limited And Another 2005 (9) TMI 47 - BOMBAY High Court the AO is directed to treat the interest income under the head profit & gains of the business as declared by the assessee Decided in favour of Assessee.

Summary

Issues:
1. Disallowance of expenses claimed by the assessee.
2. Attribution of estimated interest towards work in progress.
3. Disallowance of claim on account of sales tax deferred.
4. Treatment of interest income under different heads.

Issue 1: Disallowance of Expenses:
The appeal was against the disallowance of Rs. 7,58,82,547 being 15% of the expenses claimed at Rs. 11,39,93,239. The AO disallowed the amount due to lack of details provided by the assessee. However, the ITAT found that complete details of expenses were indeed furnished by the assessee. The AO's ad-hoc disallowance was deemed unwarranted as the necessary details were available. The ITAT directed the AO to delete the addition of Rs. 11,382,382, allowing the first grievance of the assessee.

Issue 2: Attribution of Estimated Interest:
The AO estimated interest of Rs. 14,03,810 towards work in progress at 8% rate, which was confirmed by the CIT(A). The ITAT observed that interest on debentures need not be attributed but directed the AO to examine and decide the issue afresh concerning interest amounting to Rs. 54,83,286. The second grievance was allowed for statistical purposes.

Issue 3: Disallowance of Sales Tax Deferred Claim:
The revised computation of income filed by the assessee during assessment proceedings withdrew the deferred sales tax claim of Rs. 24,83,103. The AO framed the assessment based on the original computation, not considering the revised one. The ITAT directed the AO to decide the issue afresh in light of the revised computation after giving a reasonable opportunity to the assessee, allowing the third grievance for statistical purposes.

Issue 4: Treatment of Interest Income:
The AO treated interest income of Rs. 19,26,941 under 'income from other sources' instead of 'profit & loss of business'. The ITAT found that the interest earned from fixed deposits directly related to working capital facilities should be taxed as business income. Relying on relevant case law, the ITAT directed the AO to treat the interest income under 'profit & gains of the business' as declared by the assessee. The last grievance of the assessee was allowed.

In conclusion, the ITAT allowed the appeal filed by the assessee in part for statistical purposes, addressing each issue comprehensively and providing detailed reasoning for the decisions made.